Wednesday, 22 July 2015

China - staying out of the news

A
tumble in stock prices gives rise to more worries about China but it is not
deserving of the bad press

News about China often hits the front pages
as its swift rise is both scary and a source of economic salvation. Stock markets in China have been making news
recent due to a sharp selloff in shares.
The media are quick to jump on any potential hiccup in China’s rapid
expansion due to its growing importance as a global economic superpower. Yet, the peculiarities of stock markets in
China mean that the spill over effects are likely to be limited even though the
financial sector will continue to be a source for headlines in the future.

New to this game

Picking the right stocks and when to buy
them is never easy but it is even trickier with China being a relative newcomer
to trading shares. The shorter the
period of time over which shares have been traded, the more difficult it is to
pin down what should be paid for stocks.
Many of the companies themselves are also still young and are still
fighting a fierce battle with rivals for survival. On top of this, the bulk of the investors in
the Chinese markets are locals and have less experience in trading stock.

The government further muddies the picture
with its plans for liberalising the financial markets. While fewer restrictions would be welcomed,
the reforms create jitters due to the potential pace of change depending on the
whims of its leaders. Yet, the
government regulations in themselves are part of the problem. One issue is limits on how much banks can pay
out in interest on savings accounts.
Starved of other places to put any spare cash, too many Chinese look to
make money in domestic share markets which are ill equip to deal with the
inflows.

While many eager investors have managed to
sidestep the barriers, heavy regulation of the financial markets keeps out many
more Chinese. This has the effect of
limiting any losses when the inevitable selloffs hit the stock markets. In this way, the government ensures that the underlying
economy is sheltered from any volatility in the stock markets. Neither is the stock market much of a
reflection of what is going on in the actual economy. Chinese stock prices had stagnated for a long
time prior to the recent ups and downs so it is unlikely that any bad news in
the stock markets will be a prelude to trouble with the economy.

Watch
this space

All this would not make the headlines if
happening in any other emerging market but China is a big deal these days. Its importance as the main global driver for economic
growth makes outsiders nervous. Its
haphazard mix of free market and government control means that pessimists are
quick to spot its faults. But, just like
with the patchy rules governing financial markets, the government has adapted in the past to stay on top of problems before things get out of hand.

The fear of market turmoil spilling over to
society at large will continue to keep the Chinese on a cautious path to freeing
up financial markets. Over this time, China
will continue to be plagued by a jumpy stock market as its investors grow used
to the ups and downs of share prices.
Considering that even Western investors have not fully mastered this,
the trials and tribulations of Chinese share prices will likely to be hitting
headlines again many times in the future. But, with government policy helping to stem
the spread of any losses, it is not something that needs to cause too much
worry yet.